Provision of payment is one of the most important part of any contract. Payment, which is the main form of consideration received by the contractor in exchange of delivering a work, service or any supply is an element, without which the contract is not a valid contract in legal terms. A smooth payment mechanism facilitates to maintain contractor’s cash flow and motivates contractor to perform his obligations timely and as stipulated in the contact. We can say that, timely payment to the contactor is the main driving force to execute the contract. FIDIC Red Book (Conditions of Contract for Construction) 2017 stipulates the procedure for payment in ‘Clause 14: Contract Price and Payment’ in ‘General Conditions of Contract’. In this article, we will know about the provisions of the clause in brief.
Index
Clause 14: Contract Price and Payment Clause
There are following sub- clauses of this clause:
| Sub- Clause No. | Sub- Clause Name | Description |
| 14.1 | The Contract Price | This clause describes the definition of contract price. According to it, the Contract Price shall be the value of the Works in accordance with Sub-Clause 12.3 [Valuation of the Works] and be subject to adjustments. |
| 14.2 | Advance Payment | The procedure for obtaining advance payment by the Contractor is mentioned in this clause. This clause has three sub clauses, 14.2.1, 14.2.2 & 14.2.3. Sub- clause 14.2.1 is about advance payment guarantee, Sub- clause 14.2.2 mentions that The Engineer shall issue an Advance Payment Certificate for the advance payment within 14 days after the Engineer has received both the performance security and advance payment guarantee and the Engineer has received a copy of the Contractor’s application for the advance payment. Sub- clause 14.2.3 describes the procedure for repayment of advance payment. |
| 14.3 | Application for Interim payment | This sub- clause stipulates the procedure of submission of statement for interim payment by the contractor. |
| 14.4 | Schedule for Payments | This sub- clause in about schedule for payments. According to it, if the contract includes schedule of payments, then the instalments quoted in the Schedule of Payments shall be treated as the estimated contract values. If the Contract does not include a Schedule of Payments, the Contractor shall submit non-binding estimates of the payments which the Contractor expects to become due during each period of 3 months. The first estimate shall be submitted within 42 days after the Commencement Date. Revised estimates shall be submitted at intervals of 3 months, until the issue of the Taking-Over Certificate for the Works. |
| 14.5 | Plants and Materials intended for the Works | This sub- clause mentions about the plants and materials intended for the works. If no Plant and/or Materials are listed in the Contract Data for payment when shipped and/or payment when delivered, this Sub-Clause shall not apply. |
| 14.6 | Issue of IPC | This clause has three sub- clauses, 14.6.1, 14.6.2 and 14.6.3. Sub-clause 14.6.1 mentions that the Engineer shall, within 28 days after receiving a statement and supporting documents, issue and IPC to the Employer, with a copy to the Contractor. Sub- clause 14.6.2 in about withholding amount (amounts in) as IPC. This sub- clause states that the Engineer may withhold and IPC up to the value mentioned in the contract data, before the issue of the taking over certificate of the work, for the reasons mentioned in the sub- clause. The Engineer have to serve a prompt notice to the Contractor for this. Sub clause 14.6.3 is about correction or modification. As per this sub- clause, the Engineer may in any Payment Certificate make any correction or modification that should properly be made to any previous Payment Certificate. |
| 14.7 | Payment | This clause stipulates the mechanism payment to the contractor. As per this clause, the Employer shall pay to the Contractor: (a) the amount certified in each Advance Payment Certificate within the period stated in the Contract Data (if not stated, 21 days) after the Employer receives the Advance Payment Certificate; (b) the amount certified in each IPC issued under: (i) Sub-Clause 14.6 [Issue of IPC], within the period stated in the Contract Data (if not stated, 56 days) after the Engineer receives the Statement and supporting documents; or (ii) Sub-Clause 14.13 [Issue of FPC], within the period stated in the Contract Data (if not stated, 28 days) after the Employer receives the IPC; and (c) the amount certified in the FPC within the period stated in the Contract Data (if not stated, 56 days) after the Employer receives the FPC. Payment of the amount due in each currency shall be made into the bank account, nominated by the Contractor, in the payment country (for this currency) specified in the Contract. |
| 14.8 | Delayed Payment | This clause states that, if the Contractor does not receive payment in accordance with Sub-Clause 14.7 [Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. The financial charges shall be 3%+ the average bank short-term lending rate, or where no such rate exists at that place, the same rate in the country of the currency of payment, or in the absence of such a rate at either place, the appropriate rate fixed by the law of the country of the currency of payment. |
| 14.9 | Release of Retention Money | This sub- clause mentions the mechanism for release of retention money. First half of the retention money has to be included in the statement by the contractor after the issue of the taking over certificate. If a section of work has been taken over, then the relevant percentage of the first half of the Retention Money is to be in the statement. The second half of the retention money has to be included in the statement after the latest of the expiry dates of the Defects Notification Periods. If a Taking-Over Certificate was (or was deemed to have been) issued for a Section, the Contractor shall include the relevant percentage of the second half of the Retention Money in a Statement promptly after the expiry date of the DNP for the Section. In the next IPC after the Engineer receives any such Statement, the Engineer shall certify the release of the corresponding amount of Retention Money. |
| 14.10 | Statement at Completion | According to this clause, the Contractor shall submit to the Engineer a statement at completion with supporting documents, within 84 days after the completion of the work. The following things should be incorporated in the statement: The value of the work done, b) any further sums due at the completion, c) an estimate of any other amounts which will become due after the date of completion including estimated amounts for claims. The Engineer shall then issue an IPC in accordance with Sub-Clause 14.6 [Issue of IPC]. |
| 14.11 | Final Statement | This clause has two sub- clauses. Sub- clause 14.11.1, Draft Final Statement: Within 56 days after the issue of the Performance Certificate, the Contractor shall submit to the Engineer, a draft final Statement. If the Engineer disagrees with or cannot verify any part of the draft final Statement, the Engineer shall promptly give a Notice to the Contractor. The Contractor shall then submit such further information as the Engineer may reasonably require within the time stated in this Notice, and shall make such changes in the draft as may be agreed between them. Sub- clause 14.11.2, Agreed Final Statement: The Contractor shall prepare and submit to the Engineer the final Statement as agreed. If there is any other amount which the Contractor considers have or will become due after the issue of the Performance Certificate, the Contractor shall then prepare and submit to the Engineer a Statement, identifying separately: the agreed amounts, the estimated amounts and the disagreed amount(s) (the “Partially Agreed Final Statement”. |
| 14.12 | Discharge | When submitting the Final Statement or the Partially Agreed Final Statement (as the case may be), the Contractor shall submit a discharge which confirms that the total of such Statement represents full and final settlement of all moneys due to the Contractor under or in connection with the Contract. This discharge may state that the total of the Statement is subject to any payment that may become due in respect of any Dispute for which a DAAB proceeding or arbitration is in progress under Sub-Clause 21.6 [Arbitration] and/or that it becomes effective after the Contractor has received: (a) full payment of the amount certified in the FPC; and (b) the Performance Security. If the Contractor fails to submit this discharge, the discharge shall be deemed to have been submitted and to have become effective when the conditions of sub-paragraphs (a) and (b) have been fulfilled. A discharge under this Sub-Clause shall not affect either Party’s liability or entitlement in respect of any Dispute for which a DAAB proceeding or arbitration is in progress under Clause 21 [Disputes and Arbitration]. |
| 14.13 | Issue of FPC | Within 28 days after receiving the Final Statement or the Partially Agreed Final Statement (as the case may be), and the discharge under Sub-Clause 14.12 [Discharge], the Engineer shall issue to the Employer (with a copy to the Contractor), the Final Payment Certificate. If the Contractor has not submitted a draft final Statement within the time specified under Sub-Clause 14.11.1 [Draft Final Statement], the Engineer shall request the Contractor to do so. Thereafter, if the Contractor fails to submit a draft final Statement within a period of 28 days, the Engineer shall issue the FPC for such an amount as the Engineer fairly considers to be due. |
| 14.14 | Cessation of Employer’s Liability | This clause states that the Employer shall not be liable to the contractor in connection with the contract except to the extent that the Contractor shall have included an amount expressly for it in the Final Statement or Partially Agreed Statement and in the Statement at Completion. Unless the Contractor makes or has made a Claim under Sub-Clause 20.2 [Claims For Payment and/or EOT] in respect of an amount or amounts under the FPC within 56 days of receiving a copy of the FPC the Contractor shall be deemed to have accepted the amounts so certified. The Employer shall then have no further liability to the Contractor, other than to pay the amount due under the FPC and return the Performance Security to the Contractor. |
| 14.15 | Currencies of Payment | This clause describes the currencies in which the payment will be done. According to this clause, the Contract Price shall be paid in the currency or currencies named in the Contract Data. |
Summary
In FIDIC Red Book (Conditions of Contract for Construction) 2017, has given the provision for payment mechanism in Clause no. 14 of General Conditions. This clause has fifteen sub- clauses from sub- clause no. 14.1 to sub- clause no. 14.15. The provisions regarding contract price, advance payment, schedule of payments, issue of IPC, delayed payment, release of retention money, issue of FPC, currencies of payment, etc. are stipulated in the clause. Only the brief provisions regarding sub- clauses are given in above table for basic understanding of the clause. For full provisions under the sub- clauses, FIDIC Red Book (Conditions of Contract for Construction) 2017 may be referred.
References:
- FIDIC Conditions of Contract for Construction, Second Edition, 2017 (FIDIC Red Book)
- https://fidic.org/
Disclaimer
- The description of sub- clauses given in this article is only a part of the whole clause which is relevant to the Contract Price & Payment. For whole provision under the sub clauses refer to FIDIC Conditions of Contract for Construction, Second Edition, 2017
- The content of this article is only for education purpose and it cannot be used as a legal advice. For any legal issue a suitable professional may be consulted